Category Archives: Debt

Student Loan Debt – 3 Overlooked Factors to Consider Before Borrowing

Only a few generations ago, the average high school graduate dreamed of entering the work force and securing a long-term job following graduation. A high school diploma was a ticket to a good life. Over time, the Associate’s and Bachelor’s degrees, respectively, became the new entry level standard, and dreams were adjusted. Still, higher education remained affordable for the average student who was willing to work to pay for her education. Today, however, fewer and fewer high school graduates are able to cast their dreams of continuing their post-high school education without taking on student loan debt.

The average high school student is inundated with information on student loans, yet they often remain unsure about which voices to trust. FAFSA information packets and misleading online banner ads regarding student loan forgiveness serve only as faint reminders that all student loan borrowers are obligated to repay their debt. In the end, the promise of an education combined with hope leads most borrowers to act without truly considering the consequences. For many students, the options are clear: take on student loan debt to pay for their education or miss the boat entirely.

Entering into student loan debt is a big decision for all students. Consider these critical factors before you borrow to finance your education!When I graduated high school, I found myself in this position. Despite having earned a full-tuition academic scholarship and a few other small scholarships, I did not have any means other than student loans to pay for room and board. Since I was ambitiously pursuing what amounted to a triple major, anything beyond working weekends was out of the question. I felt stuck, but I felt I had no other choice but to take a chance in that moment and hope that it would pay off.

Related: Escape From Student Loans: How Two Educators Paid of $17,831.65 in 54 Days

For any college student who is considering student loan debt to finance his education, cautious consideration of the potential ramifications is critical. Among several factors, the following three factors should be afforded special consideration by all would-be borrowers.

1. Opportunity Cost of Student Loans

Rising student loan payments represent a growing percentage of the average college graduate’s monthly budget. When I graduated college in 2009, my monthly student loan payment accounted for 11% of my monthly net income. Despite the growth of income sensitive repayment plans, other graduates may face much less favorable repayment terms. This forces many young people to make difficult decisions, including whether to

  • invest in their company 401k or pay extra on their student loans and forfeit a company match
  • continue renting longer than their parents did in order to pay down their debts
  • delay marriage and starting a family due to debt concerns
  • seek traditional employment rather than start a business due to lack of start-up funding and income-related concerns

Critics of student lending raise the point that many students are essentially tricked into a leap-before-you-look decision when the time comes to take out student loans. At age 18, most students lack the maturity and financial savvy to understand the long-term ramifications of their decision; at the same time, the industry has no problems with holding students accountable for repaying their debts.

2. Student Loan Debt Default

The impact of student loan debt stretches beyond missed opportunities and dreams deferred. According to a StudentLoans.net study, which ranked all 4,544 schools throughout the United States eligible for federal student loans according to federal student loan default rates, approximately 11.3% of all student loan borrowers default on their student loan obligations.

Entering into student loan debt is a big decision for all students. Read on to see why a major study reveals that you should consider a school's default rate before choosing a school.This statistic is alarming, as default occurs only when a borrower fails to make a minimum required monthly payment for 270 days. Many borrowers are not aware that default comes with severe consequences, including lost eligibility for deferment, wage garnishment, and sometimes severe damage to credit scores.

Though the approach might appear pessimistic to many borrowers, greater consideration should be given to college and university default rate statistics. I’m not advocating a plan-to-fail approach to choosing a university. However, the correlations as revealed in the study between school type and default rates is too clear to ignore. Not surprisingly, the type of school (public vs. private, less than 2 years, 2-3 years, 3-4 years, profit vs. non-profit) is one predictor of potential default likelihood that potential student loan borrowers should consider.

Among several takeaways from the study, the following are noteworthy:

  • For-profit schools boasted the highest default rates.
  • Public school default rates are higher than those of private schools. *Note: Community colleges are included in public school default rate calculations.
  • Students who attended non-degree granting schools were most likely to default on student loans.
  • Larry’s Barber College in Chicago, IL held the highest student default rate at 48.9%.
  • Many schools maintained 0% default rates.

You can review the study further or download and manipulate the data further here.

3. Interest Rates

Student loan interest rates have faded in and out of the American consciousness for years. Fortunately for current borrowers, the days of 6.5% interest rates on Subsidized Loans are a thing of the past. Despite improved rates over the past few years, would-be borrowers aren’t doing themselves any favors by taking student loans, especially when unsubsidized loans begin accruing interest earlier than subsidized loans.

Interest rates for loans first disbursed on or after July 1, 2016 are as follows (Source – AccessGroup.org):

Loan Type 2016–17 Interest Rate 2015–16 Interest Rate
Direct Subsidized Loans (Undergraduate) 3.76% 4.29%
Direct Unsubsidized Loans (Undergraduate) 3.76% 4.29%
Direct Unsubsidized Loans (Graduate) 5.31% 5.84%
Direct PLUS Loans (Graduate and Parents) 6.31% 6.84%

 

To Borrow or Not to Borrow

Though today’s students enjoy favorable student loan rates, a growing job market, and plenty of reason for hope, student loans remain a double-edged sword. All would-be borrowers would be wise to consider their student loan needs and all options before borrowing. The opportunity cost of borrowing to complete higher education can be costly, and as the aforementioned study illustrates, the consequences of student loan default are serious.

Thanks to Drew Cloud at The Student Loan Report for working with me to put this article together.


Do you have student loan debt? Did you consider default rates, interest rates, and other factors before you decided to borrow? 

How to Make the Most of Your Tax Refund

Tax refund: Next to the words “pay day” and “debt free,” these are my two favorite finance-related words. Whether my annual tax refund is a modest sum or a mid-size windfall, I am always happy to see my refund directly-deposited into my checking account. Admittedly, knowing how to make the most of your tax refund can be a daunting task.

Still haven’t submitted your 2016 tax returns? If you have a simple return, such as a 1040-EZ, I recommend completing your simple return with E-File.com today. You can complete your Federal return for FREE and receive free support along the way. And FinanceSuperhero readers can receive a discount on state returns by using this link – $6 Off State Filings With Coupon Code “6OFFSTATE”.

If you’re planning to complete a 1040A or require additional schedules, the team at Liberty Tax has local offices in your area to help you every step of the way. Other tax preparation services come and go, but LibertyTax has been helping people file their taxes the easy way since 1997.

Receiving a tax refund is a great opportunity to improve your financial outlook. Follow these 9 pro tips to make the most of your tax refund!

The FinanceSuperhero Guide to Making the Most of Your Tax Refund

Assuming you have a tax refund coming your way, you could be on the verge of changing your financial picture.  With great opportunity comes great responsibility! The following advice will help you to make the most of your tax refund and make significant progress on your financial journey. I recommend following the steps in numerical order.

1. Give a Portion of Your Tax Refund to a Charitable Organization

Longtime readers will not be surprised that I am suggesting giving as the first step to make the most of your tax refund. As previously mentioned, Mrs. Superhero and I have placed Giving at the top of our monthly budget. Giving aligns with our values, and helping others provides us with much more satisfaction and enjoyment than buying more stuff or eating delicious food.

I strongly believe that giving 10% is the best way that we can make a charitable contribution prior to reaching financial independence (at which time we will significantly increase our giving). We have always done this, dating back to the time when we faced a mountain of debt, and we continue to do so today, even though we are only a few months away from carrying no debt other than our mortgage.

Why? As I mentioned, we believe helping others is both a calling and the most satisfying use of our money. Giving is also a strong reminder that money is not something to be hoarded out of greed. We want to value money and practice good stewardship, but we also want to remain far removed from the love of money.

Many people reject giving in favor of keeping their money strictly to themselves. Ironically, it is usually these same people who senselessly give their money to big banks and other financiers in the form of outlandish interest payments on cars, boats, and other stuff.

Personally, I would rather give in a meaningful way. Even if you give 1% of your tax refund, you will help others and begin to change the way you view money.

2. Increase Your Savings and/or Emergency Fund

When looking to make the most of your tax return, simply saving money can be a wise choice.
When looking to make the most of your tax return, simply saving money can be a wise choice.

After supporting societal progress by giving, use your tax refund proceeds to improve your liquid savings. Unless you are an extremely high income earner or have a stable passive income stream, you absolutely must have an Emergency Fund. If you do not have one, consider this a full-blown, alarm-sounding crisis that must be addressed immediately! Statistically-speaking, there is close to a 100% chance that you will experience some form of an emergency within the next decade, so be ready!

While I recommend maintaining an Emergency Fund of at least 3-6 months of minimum living expenses, you may also wish to establish an additional Opportunity Fund. I do not specifically recommend amounts or figures for this fund, and you may wish to skip it entirely in favor of moving onto Step 3. However, an Opportunity Fund could allow you to make a fun, somewhat impulsive decision without any accompanying feelings of guilt or regret.

3. Get out of Debt – Once and For All!

After you have given and increased your security via your Emergency Fund, you are fully-prepared to take on the primary barrier standing in the way of Financial Independence: Debt.

The sooner you eliminate your non-mortgage debts, the sooner you free a significant portion of your monthly income and simultaneously gain the freedom to invest in tax-advantaged retirement accounts. Both the Snowball and Avalanche methods are valid means to achieve debt freedom. For the purposes of this post, I am less-concerned with the method you implement to eliminate your debt; just get it done. You may get the push you need if you make the most of your tax refund in this way!

 

4. Invest in Tax-Advantaged Investments

The real fun begins when you no longer have non-mortgage debt. If you are free from the shackles of debt, the next optimal use for your tax refund is to maximize your retirement contributions. For the purposes of this limited space, ensure you are maximizing employer-offered plans, specifically if they offer a match, and then move onto your Roth IRA.

Want to make the most of your tax refund? Opening an IRA or taxable brokerage account with Betterment is a smart way to maximize the impact of your refund.
Betterment returns vs. US Market and Typical Investor Returns (Credit: Betterment)

If you’re looking for an easy to use platform for investing, Betterment could be the solution for you. Their Tax-Coordinated Portfolio works to maximize your earnings and minimize tax burdens across all types of accounts, including taxable accounts, Roth IRAs, and traditional IRAs. It is simple to sign-up or rollover an account, select a portfolio of ETFs, and be on your way toward earning better returns right away.

Compared to other platforms, the Betterment portfolio is designed to achieve optimal returns at every level of risk. Through diversification, automated rebalancing, better behavior, and lower fees, the Betterment approach to investing can help you generate 2.9% higher returns than a typical DIY investor.

Make the most of your tax refund and start investing with Betterment by signing up today!

5. Contribute to Your Children’s College Funds

If you do not have children, skip ahead to Step 6. If you have children, you need to learn the nuances of the Coverdell ESA (Education Savings Account, also nicknamed the Education IRA) and 429 plan. The ESA has income and contribution limits (currently $2,000 per year), but I recommend you start with the ESA in most circumstances, if eligible.

The important thing to understand is that minimal contributions to these vehicles will place you in a position to send your children to college without the burden of student loans if you begin early.

Related PostEscape From Student Loans: How Two Educators Paid Off $17,831.65 in 54 Days

6. Destroy Your Mortgage Debt

Pause with me for a moment and imagine a life without a mortgage payment. If you can’t imagine it, check out the FREE E-book, How to Hack Your Mortgage and Save Thousands, written by my friend Andrew at FamilyMoneyPlan. This is the plan he and his wife used to wipe out their $320,000 mortgage in 6 years.

What could you do with an extra $1,000 per month? $2,500? $5,000? I just felt an overwhelming sense of excitement  and peace typing these words. The next time I visit my doctor and have my blood-pressure checked, I am going to visualize the wonders of a mortgage-free life to improve my numbers.

For the average family, mortgage interest represents the second-largest expense that they will pay in their entire lifetime. In some cases, total mortgage interest paid on a 30 year mortgage can be approximately 75-80% of total principal, even at today’s advantageous interest rates! Make the most of your tax refund to accomplish progress on an annual basis and you could shave several years off your mortgage, especially if you are already paying extra on principal on a monthly basis.

7. Invest in Non-Retirement Funds and/or Real Estate

If you have made it to Step 7, please allow me to offer my congratulations. With no debt whatsoever, healthy savings, and kids’ college covered, you are poised to generate significant wealth. At this stage, you may have achieved Financial Independence, depending upon your lifestyle.

I recommend using tax refund money to invest in simple index funds at this stage. A modest tax refund sum is enough to get you started with many index funds. Adopt a long-term approach, relax, and watch your money grow.

Similarly, this is the time to invest in real estate, if interested. Becoming a landlord isn’t for everyone, and paying a property manager could eat into your net profit from owning a rental property. However, a rental property can yield some of the highest annual investment returns if managed well and purchased at prices below market value.

Want to make the most of your tax refund? Investing in real estate with Fundrise is an exciting option for investors in 2017.Fortunately, today’s investors can invest in real estate without the hassle of becoming a landlord or hiring a property manager. Fundrise offers real estate investment options with low entry costs.. As of February 2017, they offer three eREITs for new investors: the West Cost eREIT, the Heartland eREIT, and the East Cost eREIT. It is amazing that technology has brought common investors like you and me the opportunity to invest in multi-million dollar buildings half way around the country!

Even if you’re on the fence about real estate investing or just not quite ready to dip your toe in the water, I recommend signing-up with Fundrise today – it is 100% FREE, with no obligation, and in doing so, you’ll position yourself to learn more and possibly avoid wait lists.

8. Improve the Value of Your Primary Home

At this stage, true fun begins. When you are financially well-poised for the future, a tax refund represents an opportunity to both invest and add joy to your life simultaneously. This is the time to make improvements around your home which increase your happiness and feature a high return on investment.

Good Investments: new front door, landscaping, deck or patio, kitchen or bath remodel, walkway lighting

Bad Investments: swimming pools, utility sheds

9. Build Sinking Funds for Bucket List Items

Last, but not least, comes additional saving for specific purchases. If you make it down to Step 9 when determining how to implement your tax refund, you are an authentic Superhero. I recommend establishing separate sinking funds for a variety of priorities, such as vacations, new car purchases, secondary homes, or major home additions.

The purpose of a sinking fund is to plan for future purchases which are far off in the future. At this stage, you do not want to be fooled into getting back into debt or be caught off guard by large, necessary expenses. With a sinking fund, you won’t be financially caught off guard when your house needs a new roof, your furnace fails, or your vehicle sputters and dies.

Are You Ready to Make the Most of Your Tax Refund?

A tax refund is a great opportunity to get ahead in your finances. I am confident that you will not fail to cover all of your bases by following these steps. Depending upon where you are in your journey toward Restoring Order to Your World of Finances, you may wish to skip steps or modify the order. For example, renters may wish to place saving for a home down payment in the Steps.

If you haven’t yet filed your 2016 tax returns, be sure to check out E-File.com or LibertyTax today. Either way, careful consideration of your circumstances will put you on the path to make the most of your tax refund this year!

 

Note: This post was last updated on February 14, 2017.


Readers, did you receive a tax refund this year? Are you currently awaiting a refund? How do you plan to make the most of your tax refund?

Escape From Student Loans: How Two Educators Paid Off $17,831.65 in 54 Days

Money has a funny way of making people emotional. We are elated when we earn a raise, achieve a promotion, or unexpectedly win the lottery. On the other hand, losing money lets the wind out of our sails in a hurry. Today, the ongoing escape from student loans is one such soul-crushing experience for millions of people.

If two educators can escape from student loans - over $17,000 in only 54 days - so can you! Read on to see how they did it and how you can do it, too. In 2016, the average college graduate  graduated owes $37,172 in student loan debt; No wonder many pundits believe the student loan bubble may be the next to burst!

Since April 2016, I have been free from the shackles of student loan debt. No longer sending hundreds of dollars to Sallie Mae each month is a great feeling. My wife and I are now able to invest more freely, increase our lifestyle spending, and stress less about money.

I wish our escape from student loan debt were nothing but rainbows and butterflies, but good things rarely come without a grind.

The Back Story

In May 2014, I graduated with an MA in School Leadership. When I entered repayment that November, I owed $19,724.96. My first statement revealed that a ten year repayment plan would cost a total of $27,178.23In that moment, I was determined to ensure that my $18,000 educational investment would not become a $27,000 one!

The problem? I still owed over $5,000 on my undergraduate student loans. Yes, I was stupid. The kind of stupid with several zeros and even a comma involved. I took on additional student loan debt without paying off my existing student loans.

The Escape Begins

In the summer of 2015, I began a new job as an entry-level school administrator. In October 2015, we got down to business. That month we paid just over $4,300 toward my undergrad loans and tacked on an additional $829.00 in November to wipe out these loans for good! A three paycheck month, combined with extreme frugality, provided the funds for us to do so, even on two educator’s modest salaries.

Our momentum was halted a bit in December and January, but we paid an additional $2,338.79 on the grad school loans in February 2016. I don’t remember seeing the inside of a restaurant, Target, or Banana Republic during this time.

It was around this time that I truly began to hate my job. I realized my passion just wasn’t in this job, and I knew I had to get out. I didn’t get along well with my boss, to say the least, so the departure was going to be an easy one, even if it needed to wait a few months.

We paid minimum payments, an additional $1,100 in March and an additional $4,000 in April, thanks to another 3 paycheck month. It felt like we were on a roll in some respects, but the finish line still seemed like a faint mirage on the horizon; after all, we still owed $10,166.37 even after several months of living a scorched-earth lifestyle.

We reminded ourselves: slow and steady wins the race. I was content to push slowly and steadily toward the finish line and rest in the comfort of this phrase. 

Sitting on Savings

A quick look at our emergency fund and sinking funds revealed that we could make a final payment of $10,166.37 without exposing ourselves to the unnecessary risk of an underfunded emergency fund. Upon realizing this, I told my wife that this monster payment would be the best early birthday present I could receive. Without hesitation, she gave me the green light, and just like that, our escape from student loans was complete!

Our Escape From Student Loans

If you were expecting a magical solution to student loan debt, I’m sorry – no such solution exists.

We tackled my student loans with major aggression. It was hard work. But we also made smart choices.

First, we recognized the problem and reviewed our budget. We scaled back almost every unnecessary expense: dining out, expensive groceries and toiletries, entertainment, and beer.

Next, we pressed pause on all spending other than what was necessary to survive. During those months, we paid our mortgage, utilities, required minimum payments. And we bought basic groceries. That’s it.

In addition, we stopped investing, other than our required pension contributionsThis was a risk that worked for us, and fortunately, the markets were down overall during this brief time.

Finally, we bet on ourselves and utilized a large portion of our emergency savings. This money was sitting idly in an account while we were paying 6.5% interest. This gamble also paid off for us.

How You Can Escape From Student Loans

To be perfectly clear: nothing about our escape from student loans was special. We sacrificed, scratched, clawed, and busted our butts to do it.

You can do it, too!

It may take longer for you to knock out your student loans, or you may do it even faster. But don’t let student loans knock you down. If you worked hard to earn your degree, you deserve the chance to work for yourself now; the sooner you quit paying for that fancy piece of paper, the better!

I know many people who owe far more in student loan debt than I ever did. Maybe that’s where you find yourself. If so, accept that it’s going to take time, make a plan to break free, and also make sure you’re not overpaying on your interest rates.

If I still had student loans, I would absolutely refinance them with SoFi. For anyone paying ludicrous interest rates of 6.5% and above, a quick refinance will save you hundreds of dollars. And if you sign-up using any of the SoFi links on this page, SoFi will automatically sweeten the deal and give you back $100 cash. Currently, SoFi offers fixed rates at 3.375% and variable rates as low as 2.355% if you sign-up for Auto Pay. In a matter of minutes, they can help you refinance your federal or private student loans, consolidate multiple loans, and get on a quicker path toward freedom.  

Click here to refinance your student loans with SoFi and receive $100 today!


Readers, have you experienced any recent triumphs over debt? What were the keys to your success? How did you stay motivated? If you are still in debt, when do you plan to eliminate student loans or other debt?

Good Debt vs. Bad Debt – The Great Debt Debate

What’s the quickest way to start a heated debate among a room full of personal finance experts? I’m not certain, but starting a debate on the concept of good debt vs. bed debt must rank pretty highly on the list.

What factors matter the most when it comes evaluating debt? What determines good debt vs. bad debt? The answer isn't as complex as it seems.Opinions on the matter run the full gamut. Some people believe that debt is a tool to be utilized to finance a lifestyle – because #YOLO. Others would not borrow money for any reason whatsoever because debt is dumb and Dave Ramsey says so.

The trouble with such extremism, aside from being wildly unappealing, is the fact that a one-size-fits-all approach rarely works in life. The good debt vs. bad debt debate is no different.

What kind of debts are we discussing? What are the terms? What is the purpose behind the act of borrowing? Will the items or experiences being financed maintain value? What is the opportunity cost?

All of this is enough to make heads spin.

Traditional Stance on Good Debt vs. Bad Debt

Ask five of your closest friends whether they have any debt, and you’ll likely hear variations of the following:

“No, we’re not in debt. We just have a car payment, student loans, and our mortgage.”

“We have a few credit card balances – does that count?”

Answers like these can help us to begin to frame the issues surrounding good debt and bad debt.

Traditionally speaking, the average Baby Boomer defines good debt as money owed on an appreciating asset or an experience (i.e. education) which is likely to yield financial returns or benefits. Bad debt is defined as debt incurred on depreciating assets, i.e. does not yield positive cash flow.

Over time, however, these definitions have ridden the wave of cultural change. Today, in fact, some experts preach that all debt is bad.

Today’s Views

Grandma and Grandpa may hold a traditional view on good and bad debt, but to their instant gratification seeking offspring, all bets are off. “If debt allows me to get what I want when I want it, it must be good!” they reason. This is a classic example of the leap-before-you-look mentality, and the eventual landing usually isn’t a pretty one.

Generational assumptions aside, we find ourselves at a tipping point in the Great Debt Debate. With any luck, the following may shed further light upon the issue.

Less About the Debt, More About the Debtor

Debt is a undoubtedly a complicated concept. Perhaps the only piece of the puzzle which is more complicated is the debtor himself.

When we borrow money, we make a statement about ourselves. We claim confidence in our ability to pay back our debts. This confidence can be fully justified or woefully misplaced.

Suppose for a moment that an uber-wealthy  entrepreneur purchases a beach home on Lake Michigan and takes out a mortgage. Is this a good debt or bad debt? In this case, if she has the regular income and liquidity to pay off the mortgage in a relatively short period of time, we may safely consider this a healthy debt. After all, the home is likely to appreciate over time, and the mortgage provides additional flexibility to divert funds to other investments.

Let’s change a few pertinent facts in the above scenario for a moment. Suppose our entrepreneur is already upside down on her Chicago high-rise condo and is quickly burning through liquid cash like a raging wild fire due to a poor quarter for her business. We’re looking at a bad debt in this case, in all likelihood.

When evaluating debt, the circumstances of the debtor are everything.

Critical Circumstances

So where does this leave us? What circumstances impact whether a debt is good or bad?

1. Equity

Years ago I purchased a 2008 Honda Accord from my grandparents. The vehicle was worth $17,000 at the time. I put down nearly half of the cost and financed the rest. We quickly paid the vehicle loan off, but even if we hadn’t done so, we were protected by built in equity. If at any time things went south, we could have sold the vehicle, paid off the remainder of our loan, and used the remaining cash to buy a beater car and buffer our emergency savings.

Equity is a fine mitigator of risk associated with debt.

2. Consistent discretionary income

When it comes down to the bottom line, the scariest thing about debt is the prospect that we might not be able to pay it off. As we’ve seen, equity is a great hedge against this possibility, but consistent discretionary income is even more valuable.

For the family who routinely spends all of its earnings, it doesn’t take much for what was once a manageable debt to become a significant problem. But for those who maintain sizable wiggle room on a monthly basis – say 5-10% of monthly take home pay – a healthy buffer can eliminate the stress of difficult periods which stretch the budget.

3. Liquidity (Cash is King)

Dave Ramsey begins every radio show with the reminder that “Debt is Dumb” and “Cash is King.” I feel the latter is correct, but the former requires modification. “Some Debt is Dumb” is more appropriate.

Again, assuming reasonable interest rates, debt becomes a problem when the debtor cannot meet his obligations. A healthy level of liquid cash acts as an additional line of defense. With cash in the bank, the debtor has options if debt obligations become cumbersome. He may sell the asset, rely on discretionary income to avoid touching liquid savings, or draw on his savings.

Recommendations

If you find yourself in debt or are considering entering into a debt relationship, consider the aforementioned factors to evaluate the situation. Generally speaking, based upon the established criteria above, the following are examples of good debt and bad debt.

Good Debt

1. Mortgage on primary residence

2. Home equity loan for home improvement purposes* (Depending upon interest rates, expected rate of return on the project, and existing equity)

Bad Debt

1. Student loans

2. Auto loans

3. Revolving credit card balances

4. Cash advance and pay day loans


Readers, what is your position in the “good debt vs. bad debt” debate? How do you evaluate whether a debt is good or bad? 

Change is Hard

January is a month for hope and optimism. You wouldn’t know it based upon the doom and gloom floating around in the newspapers and social media this year, but most folks are as optimistic as ever during the first month of a new year. They know change is hard, but emotions fly high.

The distance between change and complacency is small - a single step in the right direction. Change is hard because complacency is easier. But you can win!Many people hit the gym and begin a new diet with dogged determination that they will finally lose that extra weight. Others pledge to finally start saving for their dream purchase or investing for their retirement. Some people pledge to reestablish their priorities with regard to work, family, friends, and leisure.

The month of January represents new beginnings. A clean slate. A chance to start afresh and anew.

It is an opportunity to implement changes big and small. Yet January also brings about a sobering reminder each and every year:

Change is hard.

Figuratively speaking, the distance between change and complacency is very short. The difference is a single step in the direction of our goals. But taking that single step is often challenging.

Change is hard, complacency is easier

The human search for homeostasis has led us to really enjoy our comforts. I know that is why I love dining out, even if at McDonald’s. It is why I love sports, TV, and movies. It is why men love their recliners. These things provide comfort.

In order to change, you and I have to exit that comfort zone. On purpose. Repeatedly. We have to force ourselves to live on the edge of discomfort. Sometimes we may have to face our fears.

To lose a few pounds, I need to stay away from the comforts of restaurants and overindulgence in dairy, fried foods, and beer, and increase my intake of lean protein, vegetables, and fruits.

If saving money is my goal, I need to take a long, hard look at my spending habits and trim away waste. Psychologically, this type of self-correction is very necessary yet incredibly difficult to achieve with honesty and integrity.

Improving the performance of my investments is a difficult change to enact. It reveals that simple human desire and motivation are not always enough if we seek complex change. Sometimes we can do everything right and still fall short of our goals. This leads us to fear failure and avoid change.

Even our goals change from time to time. For example, a few months ago on my 30th birthday, I set five primary investment goals for the next year:

INVESTMENT GOALS
1 – Max out both of our IRAs for 2016. $11,000 total investment.
2 – Invest a minimum of $2,000 with Fundrise.
3 – Grow my overall account value with Betterment.
4 – Increase our overall net worth by 50%.
5 – Set a target date for early retirement and formulate a plan to get there.

Related Post: The Fundrise eREIT: Accessible Real Estate Investing for the Average Investor

As I write, we are most likely to fail at goals 1 and 3. Instead, due to changing circumstances, we opted to invest funds earmarked to achieve these goals in finishing our basement. These circumstances even led us to make a surprising decision – we borrowed money to complete this project. Gasp, I know. But the extremely low interest rate combined with maintaining liquidity were just too significant to pass up.

Even the decision to change our investment goals and instead invest in our home was not an easy one. My wife and I went back and forth on it many times, even though we knew that completing the project would instantly increase the value of our home by an additional 40-50% beyond the initial investment.

We hemmed on and hawed over a decision that would increase our net worth? Yup.

Change is hard because the act of change admits that are wrong in the present. Sometimes this hefty dose of humility can be too much to accept.

Change is hard because it is an act of giving up something to gain something else. And we don’t know if we all we hope to gain will be better than that which we are giving up.

Change is hard because we are often left swimming upstream, fighting against the currents of life. Two or three steps forward followed by one step backward only feels like progress for so long to our instant-gratification-seeking hearts.

Change is hard because it requires renewed commitment on a daily basis. As my father-in-law often says, there is no glory in yesterday’s victory.

Change is hard because we do not always instantly see the fruits of our labor. This is why your local gym is full in January and half empty again by the end of February.

So how can you and I change?

Change Comes From Within

I’m reminded of a vivid training scene in Rocky III, in which an over-the-hill Apollo Creed is training Rocky Balboa for his rematch with Clubber Lang. Creed pummels Rocky with a steady stream of right hooks, and Rocky’s lifeless approach to improving his technique leads Creed to question, “What’s the matter with you?!”

Rocky responds, “Tomorrow. We’ll do it tomorrow.”

A fired up Creed denounces this attitude, stating repeatedly, “There is no tomorrow!”

Rocky continues to go through the motions in training until he hits the ultimate low point. Creed deserts him and states, “It’s over.” Rocky is really on the ropes this time.

When he needs it the most, Rocky’s wife, Adrian, provides a dose of wisdom.

“Apollo thinks you can do it. So do I. But you gotta wanna do it for the right reasons. . . Not for the people, not for the title, not for the money, or me – but for you.”

“And if I lose?”

“Then you lose. But at least you lose with no excuses. No fear. And I know you could live with that.”

I think I could live with that, too. Can you?


How are you striving to change in 2017? How will you sacrifice to make it happen?

Credit Consciousness is Key to Financial Health

This post, “Credit Consciousness is Key to Financial Health,”  is sponsored and authored by Ethan who writes for Readies.co.uk. It presents a clear message on the importance of credit consciousness as a component of overall financial health.


Credit Consciousness & Financial Health

Modern consumers face myriad borrowing and credit alternatives, tempting them to buy on margin. From daily-use credit cards to home equity financing (and everything in-between), existing credit options help users cover wide-ranging costs of living. Using credit is not only convenient, but access to loans makes it possible for consumers to make big-ticket purchases they otherwise could not afford.

With so much at stake, building and preserving a strong credit rating is an essential financial pursuit. If you are armed with a sturdy credit score; financing is at your fingertips. A troubled credit history, on the other hand, can limit your options. And since credit missteps are hard to overcome, keeping-up with bill payments and other credit obligations is the only way to ensure a healthy credit score. Whether you are in the market for a loan or simply strengthening your financial understanding, consider the following credit concerns.

When it comes to credit consciousness, there are many factors to consider in order to maintain overall financial health and well-being.

Borrow Only What You Need

Well-managed debt does not strain household cash flow. On the contrary, loan payments and other obligations are a natural part of personal finance. It is only when debt levels rise beyond your ability to pay timely, that you become vulnerable to financial difficulties.

Consider the long-term ramifications of opening credit accounts and taking-on debt. Building balances on credit card accounts, for instance, can rise to an unmanageable level, leaving you to pay interest only, minimum payments. Too often, the cycle becomes unbreakable, as income levels are insufficient to chip-away at the principle balance. Worse yet, adding new charges – even as oppressive balances linger, can lead to delinquent payments, default, and damaged credit.

In order to hold debt at reasonable levels, prioritize the way you use credit. In other words, apply loans and personal financing when they are most needed, paying cash for day to day purchases. By limiting credit card use to a convenience, rather than a bank account, you’ll stay timely with monthly payments, and remain on the right side of creditors.

Evaluate Lending Options

Financing options fall across a wide range of banking products. Long term mortgages, for example, serve high-dollar real-estate deals, extending low interest rates for decades. Short-term, fast cash loans, like payday loans are available at the other end of the spectrum, using your future pay as collateral for money today. Personal loans, consolidation loans and secured equity alternatives offer even more choices for borrowers, supplying funding for everything from home improvements to automobile purchases.

Whether you’re in need of quick cash or a 30-year fixed residential home loan, evaluating lending options from several providers is the only way to be sure the financing you select has a competitive rate and favorable terms. Before committing to installment credit, compare financing terms online. And don’t hesitate to shop around for the most affordable forms of revolving credit, protecting you from predatory interest rates and unreasonable credit card fees and penalties.

Use the Best Loan for the Job

Several distinct forms of financing are available to consumers, so it is important to match the types of credit you use to the jobs at hand. A credit card charge, for instance, would not be well-suited for a big-ticket purchase to be paid-off over time. In this case, an installment loan or low-interest equity financing would be a better alternative, resulting in lower interest payments.

On the other hand, day-to-day purchases you intend to settle at the end of each billing cycle are easily managed on a revolving credit account – often earning “miles” or reward “points.” Depending upon the urgency of your financial need, you may select a short-term, “payday” loan to help bridge a financial gap. This type of financing is issued without a formal credit check, so it doesn’t take long for applicants to receive needed funding. As long as you have a job and pledge to pay timely, payday lenders are willing to float a short-term loan. Late payment triggers penalties and fees, so this type of loan is not cost-effective, beyond a single pay period.

The way you manage credit has a meaningful impact on your financial health. By staying informed and evaluating credit options up-front, you’ll avoid missteps and build positive credit relationships. Turning away from credit challenges, on the other hand, leads to financial instability and can limit your options for future financing.


How do you maintain credit consciousness? 

Managing the Cycle of Failure and Success

In the midst of studying for my state and national real estate license exam yesterday, I took a coffee break and ended up in my recliner with the Apple TV remote in hand. It was mid-morning, and Mrs. Superhero was out of the house running errands, which provided a golden opportunity: I could watch a documentary without protest.

After scrolling through my List in Netflix, I settled on Broke, an ESPN Films 30 For 30 production, directed by Billy Corben. If you’re unfamiliar with the film, this brief summary should get you up to speed:

According to a 2009 Sports Illustrated article, 60 percent of former NBA players are broke within five years of retirement. By the time they have been retired for two years, 78% of former NFL players have gone bankrupt or are under financial stress. Sucked into bad investments, stalked by freeloaders, saddled with medical problems, and naturally prone to showing off, many pro athletes get shocked by harsh economic realities after years of living the high life. Drawing surprisingly vulnerable confessions from retired stars like Keith McCants, Bernie Kosar and Andre Rison, as well as Marvin Miller, the former executive director of the MLB Players Association, this fascinating documentary digs into the psychology of men whose competitive nature can carry them to victory on the field and ruin off it.

Director Billy Corben (The U, Cocaine Cowboys, Limelight) paints a complex picture of the many forces that drain athletes’ bank accounts, placing some of the blame on the culture at large while still holding these giants accountable for their own hubris. A story of the dark side of success, “Broke,” is an allegory for the financial woes haunting economies and individuals all over the world.

After watching the film, I was left with two prevailing questions:

Why does this happen to professional athletes?

and

What can be done to stop this trend?

Photo Credit - IMBb
Photo Credit – IMBb

THE ROOT OF THE PROBLEM: SUCCESS

Throughout the much-esteemed film, Corben presents athlete after athlete who made millions of dollars only to lose it all (or come dangerously close) just a few years into retirement. From NFL stars Bernie Kosar and Leon Searcy to MLB legend Curt Schilling, the film presents a sobering view of what success can do to the unprepared, immature adult ego.

A vast majority of the athletes’ lives chronicled in the film follow an archetypical pattern: grow up in poverty, develop superior athletic skills, make it the pros, behave irresponsibly with money, retire/face career-ending injury, and go broke. While the average person has no sympathy for the rich athlete, I felt sympathy pains throughout my viewing of the film.

Each of us encounters our own unique hardships and triumphs in life; some people face more of the former than the latter, which often leads to devastating consequences in the future.

For example, consider the life of NBA legend Allen Iverson. The son of a teenage mother, “The Answer” grew up in Virginia and faced a near-constant stream of adversity. Shortly after his birth, his maternal grandmother passed away; the only fatherly-figure in his life was imprisoned and in-and-out of jail; and during his youth, eight of his best friends were murdered.

Iverson lived the ghetto life, and he had grand dreams of getting out and rescuing his family and his future. Sports were the only safe haven in the talented athlete’s life. An undersized athlete, Iverson starred on the football field and later on the basketball court.

He felt that basketball was his ticket out of poverty.

Yet, a 17-year-old Iverson nearly missed his chance entirely when he was arrested for his involvement in a mob incident at a local bowling alley. Iverson denied involvement in the incident, and he was fortunate to have been granted a release by the governor of Virginia after serving four months in prison.

Fate eventually worked in Iverson’s favor, as he was awarded an athletic scholarship to play basketball at Georgetown. Two years later, he was drafted by the NBA’s Philadelphia 76ers, who offered Iverson a $9.4 million rookie contract.

Despite his successes, including winning NBA Rookie of the Year, NBA scoring title, and All-NBA First Team honors in his first three seasons, Iverson struggled to keep his life in order. His image was tarred by his inconsistent practice attendance, selfish play on the basketball court, frequent thug-like appearance, and an arrest for marijuana and weapons charges after a traffic stop.

After being traded to the Denver Nuggets in 2006, Iverson’s career began a slow fizzle: he bounced around to other teams, including the Detroit Pistons and Memphis Grizzlies before returning to the 76ers. All in all, Iverson reportedly earned more than $200 million during his playing career; yet, he is broke today, by most accounts.

In my opinion, Iverson’s meteoric rise to riches and stardom and subsequent fall from the NBA throne can be attributed to (and blamed on) his sudden success. Iverson grew up without a fatherly figure or suitable substitute mentor in his life, and furthermore, he was conditioned to expect hardship, despite his dreams of making it out of poverty. When that success finally came, an immature Iverson was ill-prepared to handle it, nor did he possess the understanding to reflect upon the contributing factors to his success.

Psychotherapist Joyce Marter sums up Iverson’s problems in a single sentence: “We can only be prosperous in love, health, time and money if we are conscious, well and balanced.” At nearly every step in his professional life, Iverson lacked the consciousness to reflect and understand that his successes would not last forever.

Iverson

THE ANSWER: MANAGING SUCCESS IS MORE DIFFICULT THAN DEALING WITH FAILURE

Despite our culture’s prevailing focus on failure and how one should deal with it, I believe that Iverson’s example, along with countless others, reveals that managing success is more difficult than dealing with failure. Ironically, it appears that learning to manage success is the answer to the financial woes of athletes like Iverson.

In my experience as a public school teacher, the notion that failure leads to success is one theme which I have sought to impart upon my students. However, I fear that I haven’t equipped my students to properly respond when success comes their way.

Furthermore, in my adult life, I have realized that I had not been prepared to handle success. Like Bernie Kosar, Leon Searcy, and Allen Iverson, I viewed success as the end game rather than another pillar which begged to be built upon with further successes. Time and time again, success has led me to let down my guard, become lazy and proud, and forget about the practices, actions, and habits which contributed to my success in the first place.

Brian Gast at QuadrantInternational.net describes this phenomenon well:

The point is, we should not take success for granted. Failure can be whatever you want it to be, including a “valuable learning experience”. Put both to work for you, confident in the knowledge that your failures are as valuable to your long-term success and happiness, as your successes can be.

Despite the cultural tendency to focus upon failure, managing success was once a greater focus. Winston Churchill famously said, “Success is not final, failure is not fatal: it is the courage to continue that counts.” Over time, however, the failure-success paradigm has come to look like this:

Failure-Success Paradigm
Failure-Success Paradigm

If we are truly striving to put both failure and success to work and learn from both, we need to change this paradigm. Success cannot continue to be the end of the road, so to speak. I believe the following is a much more realistic, applicable, and beneficial Failure-Success Paradigm:

The Multidirectional Cycle of Failure and Success
The Multidirectional Cycle of Failure and Success

This model (which, along with the previous graphic, I created using Microsoft Paint) illustrates that the pursuit of success is an on-going process. Furthermore, it captures the multidirectional, cyclical nature of both failure and success while illustrating that one can easily lead to the other.

A SOLUTION

Now that we have an appropriate paradigm for failure and success, we can take a more detailed look at the second question posed at the outset of this post (What can be done to stop this trend?).

I feel confident that we have established that one of the worst things a man can experience is success without periodic struggle. After all, it is in the midst of a battle, large or small, that we remember what it is we are fighting for in the first place.

In looking at the trend of professional athletes going broke, we can attribute the problem to several faults:

-The athletes exposed themselves to unnecessary debt by borrowing money.
-The athletes yielded to unrealistic expectations to fund the lifestyles of family and friends.
-The athletes allowed themselves to inflate their own lifestyles to unmaintainable levels.
-The athletes trusted the wrong people to manage their assets.

Instead, the athletes would have been wise to:

-Manage their income well to minimize debt (or avoid it completely).
-Support friends and family within reason, while maintaining that they do not owe anyone anything.
-Live a lifestyle well-below their means.
-Entrust themselves to become financially literature (i.e. understand their own investments and manage their own finances).

Additionally, I believe that each professional sports league and the related player unions/association ought to feel tremendous pressure and obligation to improve the state of its financial literacy programs offered to players. The NFL maintains its Financial Education Program (FEP) and the NBA requires its Rookie Transition Program, but it is evident that these programs are insufficient.

At the same time, it is incumbent upon each player to exercise individual responsibility and rationality in dealing with his finances.

RECOMMENDED APPLICATIONS FOR THE AVERAGE JOE

In the midst of watching Broke, it was surprisingly easy for me to sit back and point my finger at the mistakes of the profiled athletes. However, by the end of the documentary, I came to realize that most of us, myself included, have made similar mistakes, albeit with fewer zeros and commas, from time to time.

In order to avoid these mistakes, I believe the average person can follow a few simple steps:

1. Do not attempt to leverage debt as a method toward seeking financial independence. Unnecessary exposure to debt is always accompanied by exposure to risk and loss. Maintaining a level of assets to cover your debts is one thing, but eliminating debt entirely is wise, if you can do it. Mrs. Superhero and  I recently paid off over $17,000 of student loan debt in 54 days for these exact reasons.

2. Be generous within reason. I recommend giving 10% of your income (gross or net is up to you) as a constant reminder that money is a tool intended to meet your basic needs, build for your future, and bless other people. If giving 10% seems outlandish, start with 1% and build your way up to 10%.

3. Cultivate a lifestyle which is in line with your values and priorities. For most people, the path to financial independence will involve some sacrifices. Develop a system to keep your spending in check. Balance is key.

4. Seek to develop greater financial literacy every day. For some, this step will be the most difficult and most humbling. Some people will need to develop a budget for the first time; if so, Personal Capital is a great, free place to start. Others will need to assemble a list of debts and formulate a plan for paying them off. Many, myself included, will need to continue to grow in their knowledge of investments. Others may simply decide to automate their investing through platforms like Betterment or pursue investments through eREITs via Fundrise.


Readers, which do you find more difficult to manage – failure or success? How do you approach both?

A Response to Shahar Ziv’s “5 Reasons to Stop Prioritizing Student Loan Payments”

After I wrote a post sharing how Mrs. Superhero and I paid off over $17,000 of student loan debt in only 54 days, I received many congratulatory comments, e-mails, texts, and phone calls. Something about sticking it to Sallie Mae really fires up people, apparently!

On the other hand, several readers wrote to me and asked about my thoughts regarding a recent Forbes article, 5 Reasons to Stop Prioritizing Student Loan Payments. I had not read the article at the time, as it was published on May 16, 2016, one day prior to the publication of my article, so I sat down and read it over a cup of coffee the next day.

The article’s author, Shahar Ziv, is a smart individual. An alum of Cornell and Harvard Business School, Ziv is currently part of the Global Corporate Strategy team at PayPal and a Forbes contributor. I, on the other hand, am an alum of far-less prestigious universities and will not likely be writing for Forbes any time soon (though I’m ready to sign on the dotted line whenever you would like, Forbes editors).

Mr. Ziv clearly wins the battle of credentials.

As I read, I found myself agreeing with some of the points Ziv made among what he labeled Five Key Insights. After all, personal finance is math, and math is pretty straightforward.

While I agree with Ziv’s math, I strongly disagree with the presumptions and logic which underpin his rationale for prioritizing retirement investing over paying off one’s student loans.

I will do my best to articulate the reasons for my position with the remainder of this post.

Personal Finance is Ultimately Personal

If you spend some time reading any of the many quality personal finance blogs today, you will certainly encounter conflicting opinions on a variety of subject matter.

Why? Personal finance is much more than addition and subtraction, algorithms and projections. It is not just math.

Dave Ramsey consistently states that personal finance is 80 percent behavioral and 20 percent head knowledge, and I believe he is correct. Knowledge without application is wasteful.

Furthermore, decisions in personal finance are not made in a vacuum. They are made by individuals who find themselves in varied and unique circumstances, the holders of dreams and goals.

I am certain that Mr. Ziv understands this. Again, in case you misread the intent of my earlier statements, he is far smarter than I am. Yet, I strongly feel that he undervalues the personal aspects of personal finance.

Responses to the Five Insights

As mentioned above, Ziv shares Five Insights regarding why he believes one should prioritize retirement investing over accelerated student loan repayment. Key Insight #1 states,

If you are lucky enough to work for a company that offers a match, it is a no-brainer to contribute extra dollars to your retirement plan instead of diverting them towards student loan payments, at least until you take full advantage of the free money.

Again, I do not disagree with the mathematical conclusions contained within this insight. However, the underlying presumptions are distressing.

Consider the following data from a US News report from April 2010:

Workers with a 401(k) or pension plan at work are among the more fortunate half of the population. Only 51 percent of all Americans worked for an employer that sponsored a retirement plan in 2008, and according to an Employee Benefit Research Institute analysis of Census Bureau data… This lack of access to any sort of retirement plan at work is not a recent trend. Only about half of private sector workers have been offered any sort of employer-sponsored retirement plan in a given year between 1979 and 2008, according to a Center for Retirement Research at Boston College analysis.

While these numbers have surely improved in 2016, it is important to note that it truly is “lucky,” as Ziv says, to work for an employer that offers a match. In the previous thirty years, we might even say that it is “lucky” for one to have the option to participate in an employer-sponsored retirement plan. With so few workers today in position to take advantage of an employer match, Key Insight #1 loses some of its luster.

Let us examine Key Insights #2 and #3:

Key Insight #2: To get an extra “doubling” of your account – the equivalent of your penny going from $5 million to $10 million – you have to start earlier. It is the early contributions that matter the most, even if they are small, because they have the most time to compound and grow.

Key Insight #3: Delaying early retirement savings to pay off more student debt may seem attractive in the short run, but is quite costly in the long run because it will be harder to catch-up on savings later.

Again, I will not argue with the math nor the logic behind these statements. Clearly, time and compound interest form one of the most powerful partnerships in the universe. However, I would like to poke at these insights. The above statements neglect perhaps the most important and unquantifiable factors of all: risk and timing.

Suppose you took Ziv’s advice from October 2007 to March 2009, when the S&P500 bull bearabsolutely plummeted, losing approximately 50% of its value. Over a 17 month period, you could have paid off a $20,000 student loan with monthly payments of approximately $1,200. On the other hand, had you invested a similar monthly amount, you would have been raked across the coals due to your negative investment returns. To make matters even worse, you’d still have a pile of student loan debt!

Of course, I must acknowledge the flip side:  you could have accepted Ziv’s advice beginning in mid-March 2009 and ridden an incredible bull market.

My point is this: when you invest while you still have lots of debt, you are exposing yourself to increased risk while hoping that your timing is right.

Even with an employer match, there is no such thing as a guaranteed investment return when you are investing in the stock market.

On the other hand, dollar for dollar, paying down student loan is a guaranteed boost to your net worth, assuming no other financial changes. But when you invest, there is always a chance you could lose it all.

Ziv’s lack of consideration of risk is troublesome. His article makes no mention of an emergency fund. Funneling your extra dollars into investing rather than first paying off debt or building an emergency fund exposes you to very unnecessary risk. Obviously, if you have an emergency, you will have to raid your retirement accounts or take on further debt.

To quote Warren Buffet, “Only when the tide goes out do you discover who’s been swimming naked.” Anyone can look like a genius by following Ziv’s advice in a strong market. When the tide turns, this advice is revealed to be unsound, in my opinion.

While timing and risk are the most significant variables overlooked within Key Insights #2 and #3, Key Insights #4 and #5 overlook the realities of living in the present while balancing the priorities of the future.

Key Insight #4: The tax-advantaged status of retirement accounts and the ability to lower your tax burden by deducting student loan interest are additional reasons to funnel extra funds towards retirement and not your loan balance.

Key Insight #5: Even after you are maximizing your employer’s retirement match and even if the interest rate on your student debt is higher than the rate you expect your retirement savings to earn, you are still better off concentrating on retirement contributions over student debt repayment in all but the most extreme cases.

Yes, the ability to deduct student loan interest is a nice benefit when facing student loan debt. I will not deny that. However, continuing to carry one financial obligation (student loan debt) for the purpose of reducing the size of another financial obligation (taxes owed) smacks of silliness. Furthermore, the $2,500 student loan interest deduction is both limited and not available to everyone. See this article for a thorough explanation.

Further Thoughts

In his article, Ziv highlights that some student loan payments are just as burdensome as second rent payments, yet he still advises that you keep these student loan payments and focus on your retirement accounts.

What about when the time comes to stop renting and buy a house? That $900 per month student loan payment hanging around your neck will significantly harm your debt-to-income ratio and hinder your ability to purchase a home.

Take, for example, a couple who earns $5,000 gross income per month and does not carry student loan debt or any other debts. They are seeking to buy a home with a 30 year mortgage at 3.5% with a $10,000 down payment and have gone through the pre-approval process.  They have been told that they can afford a maximum monthly mortgage payment (including principal, interest, taxes, insurance, association dues, and private mortgage insurance) of $1,400. Their calculation was developed using the top formula below.

  1. Monthly Income X 28% = monthly PITI
  2. Monthly Income X 36% – Other loan payments = monthly PITI

Now, let us compare this couple to another couple who earns an identical income but carries collective student loan obligations of $900 per month. Their situation requires utilization of the second formula below, which places their maximum monthly mortgage payment at $900 per month.

Which couple is going to be able to afford the better home?

The Final Word

Ultimately, the decision to prioritize accelerated payoff of student loan debt or retirement savings  is not a “right vs. wrong” issue. It is a matter of personal preference. The Know Thyself Principle indicates that you should examine your values and goals to determine what is ultimately best for you.

Only you understand your values, goals, and dreams.

Only you know what level of risk with which you are comfortable.

Mrs. Superhero and I paid off over $17,000 of student loan debt in 54 days because we abhor even small risks. Paying off student loans represented a guaranteed boost to our net worth, while investing that $17,000 presented a risk that we were not comfortable taking given the presence of student loan debt. For us, prioritizing our student loan repayment was the right thing to do.

Our life experiences have taught us that tomorrow is promised to no one. With this truth in mind, we aimed to balance our future goals with our desire to live purposeful, fulfilled lives in the present.

Paying off your debts can provide significant peace, freedom, and opportunities. I sleep much better at night since I have paid off my student loans. Without the obligation of student loan payments, Mrs. Superhero and I are free to tell our money where to go and what goals to accomplish.

In the end, when it comes to all money matters, you have to decide for yourself. To let Shahar Ziv, Dave Ramsey, Suzie Orman, or (especially) FinanceSuperhero decide for you would be a colossal error.

Kicking Sallie Mae to the Curb: Goodbye, Student Loans!

In my nearly two months as a member of the personal finance blogging community, I feel I have developed a good grasp on the different types of financial bloggers. Some aim to share a technical and sophisticated approach to personal finance, while others are more simplistic and inspirational in nature. Some are humorous and self-deprecating, while others think they know way more than they do (Brief digression: Visit BeardsandMoney for a great article which touches on this topic). No matter the financial state in which a reader my find herself, there exists several blogs which can help her navigate the twists and turns of personal finance.

In the past year, the community has exploded with a host of new bloggers who are advancing our niche and providing me with plenty of inspiration to improve my writing and provide articles which are accessible and thought-provoking for readers. Challenges like the Million Dollar Club launched by J. Money, the Yakezie Challenge launched by Financial Samurai, the Save the Savings Challenge launched by Andrew at FamilyMoneyPlan, and a somewhat-secret project (in which I will be participating) in the works to be announced next week by two to-be-named-later writers, have added to the atmosphere of collaboration, encouragement, and excitement in our community.

Related: See the Blogroll

While this is all very exciting, Mrs. Superhero and I hardly need additional things about which to be excited. Friday was a big day for us. We pulled the trigger and kicked Sallie Mae to the curb by paying off my graduate school student loans!

I wish this story were nothing but rainbows and butterflies, but good things rarely come without a grind.

The Story

In May 2014, I completed my Master of Arts degree. When I entered repayment that November, I faced these terms:

GS2

 

 

 

 

 

 

I read further and my the lump in my throat began to grow:

On your current repayment plan, including interest and capitalization, your total estimated amount to be repaid is $27,178.23.

While I was relieved to have completed my degree, I must admit that I felt a little clammy and my blood pressure rose a bit when looking at the previously mentioned figures. In that moment, I was determined to ensure that my $18,000 educational investment would not grow by over $9,000, or approximately $900 per year, over the standard 10-year repayment term.

The problem I faced at the time was that I still owed over $5,000 on my undergraduate student loans. Yes, I was stupid. The worst kind of stupid. The kind of stupid with several zeros and even a comma involved. I took on additional student loan debt without paying off my existing student loans.

As I approached repayment, I was nervous. But mostly I was angry at the guy in the mirror for digging myself into such a large hole.

Climbing Out of the Hole

There are two different ways to tell this story.

The Short Version

All in all, we paid off a total of $21,229.00 of graduate school student loan debt over the course of 19 months, or 1 year and 7 months. This is an average of $1,117.31 per month, which does not appear particularly impressive or sacrificial for two working professionals who also own and operate a small business and engage in side hustles.

As I reflect and experience the benefit of hindsight, I think we should have paid off the loans much sooner. Maybe we could have done so if we had cut back on dinners out with friends, took a staycation  in place of our modest vacation last summer, and kept driving Mrs. Superhero’s vehicle from college.

This version, while still happy, is vanilla, incomplete, and unsatisfying. It’s the financial success story equivalent of the How I Met Your Mother series finale.

Ted
No spoilers from this HIMYM super-fan

 

 

 

 

 

 

 

The Longer (Better) Version

While The Short Version is factually accurate, it misses some of the finer nuances of our journey toward freedom from student loans. Perhaps the biggest fault of The Short Version is that it is leaves out two other significant financial successes which occurred as recently as the previous 11 months.

In July 2015, Mrs. Superhero and I decided it was an opportune time to upgrade from our 2000 Mercury Sable. Our search led us to a 2013 Hyundai Sonata. We had planned to purchase a vehicle with cash in the ballpark of $8,000-$10,000, but the  we couldn’t shake the idea of the Sonata and drove it home two days after taking it for a test drive. This depleted our $10,000 car sinking fund (and led us to take out an $8,000 loan with a 36 month term at a very low interest rate to cover the difference).

Two months later, in October 2015, I had another sweaty, racing heart moment when I sat down and reviewed the spreadsheet of our total non-mortgage debt. As I mentioned earlier, we still owed just over $5,000 on my undergraduate student loans, in addition to $19,000 on my graduate school student loans and the $8,000 auto loan. This was a sobering realization.

The hole had gotten even deeper, and while we had a new-to-us vehicle to show for it, I knew that something needed to change. That month we paid just over $4,300 toward my undergrad loans and tacked on an additional $829.00 the following month to wipe out these loans for good!

Our momentum was halted a bit in December and January, but shortly after the calendar turned, another look at my Excel sheet sent me back into orbit. In addition to minimum payments on the Sonata and grad school loans, we paid an additional $2,338.79 on the grad school loans in February 2016. Following a similar plan, we paid minimum payments and an additional $1,100 in March and an additional $4,000 in April. It felt like we were on a roll in some respects, but the finish line still seemed like a faint mirage on the horizon.

In personal finance and investing, we all know the mantra: slow and steady wins the race. I was content to push slowly and steadily toward the finish line and rest in the comfort of this phrase. That is, until I snapped for a third time last week.

A quick look at our emergency fund and sinking funds revealed that we could make a final payment of $10,166.37 without exposing ourselves to the unnecessary risk of an underfunded emergency fund. Upon realizing this, I told Mrs. Superhero that this payment would be the best early birthday present I could receive. Without hesitation, she gave me the green light, and last Friday, I submitted the payment!

Reflections

I feel The Long Version shows that perhaps I am being a bit hard on us, as we paid $10,000 as a downpayment on a vehicle in July 2015 and paid off the final $5,168.83 on my undergraduate student loans in this same time period that we paid off my grad school loans. Over 19 months, the total student loan and car debt paid + car downpayment figure rises to $36,397.83, or $1,915.67 per month.

The averages get more fun when you consider that we really got intense beginning in July 2015. From July 2015 to the present, we paid a combined total of $28,889.37 on the aforementioned student loan and auto debts, or an average of $2,626.34 per month for 11 months.

Narrowing the focus further, I realize that we paid off $17,831.65 in the 54 days leading up to May 13, 2016. This averages out to $330.21 per day!

Why This Worked For Us

Among the reasons for our success, three reasons stand out in my mind:

Effort and maximization. As previously mentioned, Mrs. Superhero and I have worked a lot over the past 19 months to make the aforementioned accomplishments a reality. We could have whined and complained about the predicament that we I placed us in, but instead we took action and did something about our unhappiness.

Values identification. Mrs. Superhero and I loathe debt with a passion. While we could have used the aforementioned funds to significantly build our investment portfolio over the past 19 months, I am satisfied with our decision. Over this time frame, the S&P 500 and VFINX, two important benchmarks for investors, have produced underwhelming results, in my opinion. And even if they had produced steady and modest growth, our values still indicate a preference for eliminating debt at this stage.

Sacrifice. I am fairly convinced that many people who know me and Mrs. Superhero personally think we are weird due to our handling of our finances. Once they have read this article, they are sure to think we are even weirder! Going against the grain of today’s culture with regards to our finances has been a sacrifice at times, but a worthwhile sacrifice nonetheless.

Recommendations

  • Identify your values and establish a set of written financial goals as soon as possible. I know plenty of people, including fellow bloggers, whose values and goals have led them to defer paying off their debt in favor of growing an investment portfolio and developing passive income streams. I do not begrude or criticize them for their choices, as their pursuits are grounded by values and goals.
  • Do not stray from your established goals and timelines without good reason. You will be tempted to give up and spend, but you shouldn’t do so in order to impress people you don’t even know. Don’t do it!
  • If you are drowning in student loan debt or other debt, explore refinancing with SoFi. SoFi is an excellent option to reduce the total amount of interest paid over the lifetime of a loan and make the pursuit of debt freedom much more manaegable for money people. Check out your options for student loan refinancing  and personal loan options here. You will receive a $100 welcome bonus when you sign-up!
  • If possible, join me and Mrs. Superhero in freedom from student loan debt. It is truly a great feeling. We hope to replicate this feeling in a few more months when we pay off the Sonata; however, that will come after we build our opportunity fund and navigate the summer months ahead.

Disclaimer: All links to SoFi are affiliate links. While I cannot personally share a testimonial regarding the product because I no longer have student loans which could be refinanced, FinanceSuperhero will always recommend products that can help readers accomplish their goals in a faster and more cost-effective manner.


Readers, have you experienced any recent triumphs over debt? What were the keys to your success? How did you stay motivated? If you are still in debt, when do you plan to eliminate student loans or other debt?